On Thursday, Goldman Sachs maintained a Neutral stance on HP Inc. (NYSE:HPQ) with a steady price target of $33.00. The firm's analysis highlighted that HP's second fiscal quarter earnings per share (EPS) of $0.82 closely matched the Goldman Sachs and consensus estimates of $0.83 and $0.81, respectively. This was due to a combination of a revenue outperformance in the Personal Systems segment and a shortfall in segment margins. Print revenue met expectations.
HP has observed initial signs of recovery in the PC market, with Personal Systems revenue growing by 2% (excluding foreign exchange impacts), marking the first rise after eight consecutive quarters of decline. The rebound in the PC segment was primarily driven by Commercial sales, with North America and Europe showing stabilization in both small and medium businesses (SMB) and enterprise sectors, which helped to counterbalance the weaknesses observed in Asia, particularly in China.
The company's strategy around Artificial Intelligence (AI) PCs is not expected to significantly impact the fiscal year 2024 but is projected to account for around 10% of shipments in the second half of fiscal year 2024. These AI PCs are anticipated to lead to a 5-10 percentage point increase in average selling prices (ASPs) over time. HP's current inventory levels stand at $7.5 billion, which is considered high but is primarily due to in-transit inventory and strategic component acquisitions.
HP is focusing on cost management to support Personal Systems EBIT (earnings before interest and taxes) margins, which are expected to be at the high end of the 5-7% range in the third fiscal quarter of 2024 and to remain solidly within that range for the full year. However, consumer PC demand continues to be weak, and the company is preparing for below-seasonal high single-digit percentage quarter-over-quarter growth in Personal Systems for the third fiscal quarter of 2024.
In the Print segment, revenue was on target, but margins saw a quarterly decrease of 90 basis points to 19.0%. For the third fiscal quarter of 2024, HP anticipates Print EBIT margins to be in the upper half of the 16-19% target range and to reach the high end for the full fiscal year.
Despite a reduction in share repurchases in the second fiscal quarter ($100 million compared to $500 million in the first fiscal quarter), HP reiterated its free cash flow (FCF) forecast for fiscal 2024, which ranges from $3.1 billion to $3.6 billion. The company also remains committed to its goal of returning 100% of free cash flow to shareholders.
Following these assessments, Goldman Sachs has increased its EPS estimates for HP by an average of 2% for fiscal years 2024, 2025, and 2026, factoring in lower other expenses.
InvestingPro Insights
Goldman Sachs' neutral outlook on HP Inc. (NYSE:HPQ) is underscored by a mix of strengths and potential concerns reflected in recent market data and InvestingPro Tips. With a market capitalization of $32.09 billion and a trailing twelve-month P/E ratio of 7.98, HP appears to be trading at a low price relative to its near-term earnings growth. This is in line with the InvestingPro Tip highlighting the stock's low P/E ratio, suggesting potential value for investors.
HP's commitment to shareholder returns is evident with a dividend yield of 3.36% and a history of raising its dividend for 7 consecutive years. This consistency in dividend payments, which has been maintained for 54 consecutive years, may appeal to income-focused investors. Meanwhile, the company's robust free cash flow yield is also worth noting, as it aligns with the InvestingPro Tip that points to a strong valuation implication.
Despite the challenges in the PC market, HP's stock has demonstrated resilience with a strong return over the last month (16.77%) and three months (16.82%), which may signal investor confidence in its recovery and strategy shift towards AI PCs. For those looking to delve deeper into HP's financial health and stock performance, there are additional InvestingPro Tips available at https://www.investing.com/pro/HPQ, providing a comprehensive analysis. To gain access to these insights, readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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